Non-performing loans and financial performance of commercial banks in Uganda : A case study of Tropical Bank Limited

Abstract

The main objective of the study was to examine the influence of non-performing loans (NPLs) on commercial banks in Uganda, with a case study of Tropical Bank Limited. The study adopted a descriptive research design and a quantitative approach by purposively selecting Tropical Bank Limited out of the 24 commercial banks in Uganda. Data was collected from Bank of Uganda reports and Tropical Bank Limited annual audited financial statements for the last five years 2014 to 2018. Data was analyzed using descriptive statistics which includes the use of standard deviation and means. Inferential statistics included Pearson correlation, linear regression and ANOVA. The study used NPM, ROE and ROA as the proxies for financial performance and the SPSS statistics program was used to test the research questions. The findings of the study found that NPLs significantly and negatively affect Tropical Bank’s Net profit margin (NPM), Return on Assets (ROA) and Return on Equity (ROE). The study also found that Tropical Bank has faced high levels of NPLs for the five-year period under study. Therefore, the study concludes that NPLs significantly and negatively affect the financial performance of Tropical Bank Limited. This has triggered the Bank into making persistent losses over the period and therefore for the Bank to normalize performance it needs to minimize the NPLs. The study recommends Tropical Bank Limited's Management, Loans Officers and other stakeholders to: carryout proper and adequate appraisal process of loans to clients to control and minimize loan default at the Bank. The Bank should embark at group lending as this will minimize loans default since group lending consists of a group of borrowers who work together, support and mentor one another to maximize the impact that loans have on each individual. Proper assessment of credit worthiness of clients and this can take a longer time as the longer it takes the better. Lending at the Bank should be based on capital, character, capability, purpose, amount, repayment term and security.